Budget 2020's response to Covid -19

Last Friday, I was invited to appear before Parliament’s Epidemic Response Committee on Tuesday 19 May. The topic was Budget 2020.

My remarks began by pointing out that one measure of the scale of the coming recession is the two-year decline in real Gross Domestic Product (GDP). Treasury projects that real GDP will be 5.6% lower for the year ended June 2021 than in the year ended June 2019. That would be the biggest two-year decline since 1951-1953.

However, this calculation overlooks forgone real GDP growth. Treasury’s Budget 2020 forecast for real GDP in fiscal year 2021 is 11% lower than it forecast in December 2019.

Yet even these underestimate the full cost. By 2024, the cumulative projected lost GDP will be 27% of 2020 real GDP. Since annual nominal GDP is about $320 billion, that loss represents $48,000 per household.

Researchers will debate for decades how much of that decline was due to the lockdown and if that cost was proportionate to the statistical value of saving lives.

To add some wind into the coming economic doldrums, Budget 2020’s has pulled together $50 billion of additional spending.

All of it, and more, is to be funded from borrowing. The cumulative fiscal deficits between 2020 and 2024 using the OBEGAL measure (operating balance before gains and losses) rise to $100 billion.

But Government is primarily shifting money around, which benefits some at the expense of others and transferring net worth from the Crown to the recipients. Those missing out might have otherwise benefited from that Crown net worth.

The losers hardly know who they are, but the winners know what they have gained. This is why deficit spending might be politically seductive, but is actually highly dangerous.

Those were my core points for the committee. The rest of my presentation covered why a Government spending led recovery strategy is not the most efficient way to get the country back on its feet.

In tough times, it makes sense for the Government and households to spend more than they earn. But poorly-justified spending and restrictive regulations do not make sense.

The only way for New Zealand to generate greater income is to create new jobs and boost productivity. Entrepreneurs do not need Government to lead them. They need to be freed up to find a market niche and do their best to satisfy that need.

In other words, Governments should aim to keep regulatory and tax barriers low rather than high.

Dr Bryce Wilkinson's speech to the Epidemic Response Committee can be found here.